Indonesia takes on Top End cattle

In the wake of Japfa Comfeed Indonesia’s acquisition of two Top End cattle stations Samuel Wibisono, Japfa’s GM Beef Division, explains the opportunities and challenges for Australian beef exporters into a growing Indonesian market.

In the wake of Japfa Comfeed Indonesia’s acquisition of two Top End cattle stations Samuel Wibisono, Japfa’s GM Beef Division, explains the opportunities and challenges for Australian beef exporters into a growing Indonesian market.

Japfa recently acquired two cattle stations in Australia’s Top End. Could you provide some background on the acquisitions?

There’s been a lot of talk with regard to Indonesian state-owned enterprises’ initiatives to own cattle stations of up to a million hectares in recent times. But Indonesians have owned cattle stations in Australia for a while now, dating back to the Tipperary station, so it’s not a new concept.

The Japfa group believes in the strength of vertical integration. We’ve been looking to vertically integrate our cattle business for a long time, but we started to look at it again seriously in 2012. We did due diligence on two other stations but weren’t able to close the deal.

The biggest issue for us has been that in terms of return on investment (ROI), the numbers haven’t been that exciting when compared with other opportunities in South East Asia. That’s why we didn’t invest earlier. But I think the timing is right now in terms of where property valuations are at, so we hope it’ll be a good investment as a long-term play.

To what extent have property valuations shifted?

Valuations have come back quite a bit since the peak in 2009. We think that with the relaxation of the 350 kilogram weight limit and the import quota system by the Indonesian government, land valuations will improve in the Top End.

Japfa has a sizable feedlot operation in Indonesia. Why not just continue to purchase feeder cattle from Australia? What’s the advantage of investing upstream in Australia?

We’d like to be an instrument in the way genetics are being developed in the Northern Territory. By being fully integrated, we have our own processing plant and slaughter house. We don’t believe the more popular Brahman cattle offer the best yield there.

For a number of years, we’ve been promoting the possibility of Euro-type crossbreed cattle across the Top End but the producers have been quite slow to switch. I can understand: they have issues with market access for some Euro-type livestock. The Brahman is preferred in most of the feedlots in Asia. But being an integrated operator, we’re trying to maximise yields and the Euro-type do a better job for us in the feedlots and the slaughterhouse.

So one of the initiatives we’d like to pursue with our two properties is to accelerate Euro-type cattle into the herd. There are already some Charbray genetics in Inverway. We’ll also be keeping all the male progeny as bulls. Hopefully that will improve the productivity and yields at the station level but will also have that follow-on effect at the feedlots as well as in the slaughterhouse.

The acquisition will have great benefit in terms of productivity and yields across the supply chain. There aren’t many producers that have caught on to that idea. One or two of the more progressive producers have been putting on some high yield-type cattle but the others have been very slow. So I think this integration means we’ll be able to provide a captive market for our own station and our own supply chain.

How do you see demand for beef growing in Indonesia?

Traditionally Indonesians mainly eat fish and chicken. But with an expanding middle-class and better purchasing incomes, there’s a growing preference for beef as a better source of protein. The beef sector is likely to see a 5 to 7 per cent growth in demand. When you look geographically, that’ll be closer to double digits in places like Jakarta. Growth will be much higher there compared with the smaller cities and outside regions.

How does this growing middle-class in Indonesia perceive Australian products? Is Australia’s ‘clean and green’ image a plus or do consumers generally look for a value proposition?

I think the image of imported products still has that value add. A good example would be our affiliated company that produces fresh milk under the Greenfields brand. All the milk is produced in a dairy farm in East Java and is processed on site. It’s been branded and positioned as an imported product but people have been pleasantly surprised to find it’s actually a domestic product.

So I think there’s some value in terms of imported products, but more and more Indonesians will want to see products that are produced locally, in line with growing nationalism. I think that’ll be a good position for our operation where we’re producing the product domestically to some extent.

As domestic companies improve their issues with facilities and improve food safety through better traceability systems and are able to communicate it to consumers, the nationalistic movement will grow a lot faster. That’s especially the case for beef, because Halal is a very big issue. Locally processed beef is perceived to be guaranteed Halal when compared to imported beef.

Do you foresee a return to the previous levels of livestock exports from Australia to Indonesia?

The high point was 2009/2010, when Indonesia was importing 750,000 head of cattle from Australia annually. The Indonesian government has relaxed the 350 kilogram weight rule but whether those 2009 numbers are achieved again will depend on whether the agricultural industry will continue to import slaughter cattle.

But I think it really comes down to the supply capabilities more than anything else. Certainly the demand for live cattle from Indonesian feedlots is always there. There’s over one million head capacity in Indonesia’s feedlots.

Of course, then there’s growing competition from other importing markets in South East Asia. Everyone’s very excited about China. We’re expecting growing competition from other importing countries for the cattle.

Why did you decide to partner with NAB to finance your recent acquisitions?

Traditionally, our main relationship is with a European bank, so it’s a credit to NAB’s team in Darwin that we decided to partner with them. They were able to deliver the product in a short period of time and were also very competitive in terms of the pricing. We were quite pleasantly surprised. They really pulled out all the stops. I hope from here we can continue to do business. We’re looking at other opportunities in Australia and China.

This article was first published in Corporate Finance Insights – February 2014. Read more articles.

About the Author

The Advisory group works with NAB’s industry and product teams to provide strategic and analytical insights. Our teams have specific areas of expertise to offer a wide scope of capabilities across capital structuring, financial strategy, transaction execution, advisory and risk management.